Citizens Financial Group Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 19, 2022

There are 11 speakers on the call.

Operator

Morning, everyone, and welcome to the Citizens Financial Group First Quarter 2022 Earnings Conference Call. My name is Tawny, and I'll be your operator today. Currently, all participants are in a listen only mode. Following the presentation, we will conduct a brief question and answer session. As a reminder, this event is being recorded.

Operator

Now, I'll turn the call over to Kristin Silberberg, Executive Vice President, Investor Relations. Kristen, you may begin.

Speaker 1

Thank you, Tawny. Good morning, everyone, and thank you for joining us. First, this morning, our Chairman CEO, Bruce Banson and CFO, John Woods, will provide an overview of our Q1 results Brendan Flynn, Head of Consumer Banking and Don McCree, Head of Commercial Banking are also here to provide additional color.

Speaker 2

We will

Speaker 1

be referencing our first Quarter earnings presentation located on our Investor Relations website. After the presentation, we'll be happy to take questions. Our comments today will include forward looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for your review on Page 2 of the presentation. We also reference non GAAP financial measures, so it's important to review our GAAP results on Page 3 of the With that, I will hand over to you, Bruce.

Speaker 3

Thanks, Kristen. Good morning, everyone, and thanks for joining our call today. There clearly been changes in the external environment relative to what was expected coming into the year along with significant volatility. We feel we've executed well in this environment and are positioned to perform well over the course of 2022. Among the highlights of the quarter, we had a successful conversion of the HSBC branch and online customers, Which was then followed by closing the Investors acquisition on April 6.

Speaker 3

We continue to take actions to position our balance sheet well for rising rates And we've made further progress on our strategic initiatives, including our digital agenda and top seven program. With respect to our financial results, we are off to a good start with underlying EPS of $1.07 and ROTCE of 13%. This is generally our softest quarter from a seasonal standpoint given fewer days in the quarter and the impact of payroll taxes on expenses. Net interest income was up 2% sequentially given 3% average loan growth and higher NIM, which more than offset a sizable drag From lower PPP loan forgiveness revenue and day count. We saw lower revenue in capital markets and mortgage given the environment, The high volatility benefited our global markets hedging business.

Speaker 3

We maintained strong deal pipelines in capital markets I remain optimistic for a significant revenue pickup if markets stabilize. We managed expenses well in the quarter And turnover has normalized somewhat. Credit metrics are all excellent and so far both our Consumer and corporate customers are navigating well through the current challenges. Our balance sheet remains in great shape With a CET1 ratio of 9.7%, we have the capacity to grow loans, pursue fee based bolt on acquisitions, Raise our dividend in the second half of the year and buy back some stock. Our loan growth has picked up on the commercial side, We plan to throttle back our growth in mortgage and auto a little, which will maintain an attractive LDR.

Speaker 3

I'd like to shift gears to emphasize a few key points that are topical for investors at the moment. First, and to be clear, we will benefit nicely Our funding base is vastly improved from where it was entering the last rate up cycle. We have a 7% benefit from a 200 basis point gradual rise in rates, a 10 basis point cost of interest bearing deposits And an 83% loan to deposit ratio. We project roughly $300,000,000 in higher NII given the current curve, Which annualizes to much more in 2023. This will more than offset roughly $100,000,000 in lower fee income from the environment.

Speaker 3

John will take you through this in detail in his remarks. 2nd, while inflation pressures are real and the possibility of session in 2023 has increased, we feel our credit risk position is in very good shape. We have maintained a super prime High prime risk appetite in consumer and over time we have migrated our credit exposure in commercial to bigger companies who have better credit profiles. As a result, our overall credit profile has improved over time. Our real life and CCAR stress test results Demonstrate that our credit profile is slightly better than middle of the super regional pack.

Speaker 3

And we have carefully assessed investors' credit book and loss history And remain confident in their positioning, which we will further harmonize over time. Lastly, with respect to acquisitions, I would like to highlight that our focus in 2022 is on integrating the acquisitions that we made last year And getting each of those off to a strong start, particularly our New York City metro area initiative. We will still look for acquisitions in the wealth space, but we are highly disciplined acquirer and have not been able to get much done as a result. With respect to Florida, we now have 8 branches in the state and job 1 is bringing them to network performance levels. There does not appear to be much to do that's attractive inorganically and the likely path is that we will open several more wealth centers In short, you can count on us to maintain the strong financial discipline we've exhibited since the IPO.

Speaker 3

All in all, we feel very good about how we've started the year and how we are positioned to navigate the challenging environment. Given the significant move in rates and the closing of the 2 bank acquisitions, we've provided detailed guidance in our earnings presentation To assist analysts and investors in updating their models, we continue our journey to building a great bank that can do ever more for our stakeholders. And with that, I'll turn it over to John.

Speaker 2

Great. Thanks, Bruce. Good morning, everyone. First, I'll start with our headlines for the quarter. We reported underlying net income of $476,000,000 and EPS of $1.07 Our underlying ROCE for the quarter was 13%, which includes the impact of a modest credit provision benefit.

Speaker 2

Net interest income was up 2% linked quarter, Driven by strong loan growth and a 9 basis point improvement in margin. Period end loan growth was up a solid 2% linked quarter. Our retail loans are up about 3%, while commercial loans are up 2% or 3% ex PPP impacts. Average loans are up 3% linked quarter paced by commercial, up 3% or 4% ex PDP and retail up 3%. Fees were down 16% linked quarter, driven primarily by lower capital markets fees off a record prior quarter, Given market volatility, seasonal impacts and some pull forward of transactions into the Q4.

Speaker 2

On a positive note, We had our best quarter ever in interest rate and commodities revenues as we help clients manage through the volatile environment. We remain disciplined on expenses, which were up 3% sequentially excluding acquisitions, reflecting seasonal payroll tax impacts. Year over year expenses were up a modest 2% excluding acquisitions. We reported an underlying credit provision benefit of $21,000,000 which reflects Strong credit performance across the retail and commercial portfolios. The near term macroeconomic outlook remains positive, Though we are monitoring whether Fed actions to slow inflation can do so while engineering a soft landing for the economy.

Speaker 2

The underlying credit benefit for the quarter excludes $24,000,000 for the double count of day 1 CECL provision expense tied to the HSBC transaction. Our ACL ratio stands at 1.43 percent, down slightly from 1.51% at the end of 2021 And the 1.47 percent day 1 CECL level. Our tangible book value per share was down 10.5% linked quarter, Driven primarily by the impact of rising rates on securities and hedge valuations that impact AOCI. We continue to have a very strong capital position With CET1 at 9.7 percent after a 20 basis point impact from the HSBC transaction. Next, I'll provide some key takeaways for the Q1 while referring to the presentation slides.

Speaker 2

Net interest income on Slide 6 was up 2% Given strong loan growth and the benefit of higher rates, more than offsetting the approximately $41,000,000 combined impact From lower day count and the reduced benefit from PPP forgiveness. The net interest margin was 2.75%, Up 9 basis points reflecting the benefit of higher rates with front book yields rising, which more than offset reduced PPP benefit. Margin is also benefiting from lower cash balances as we continue to redeploy some of our excess liquidity into loan growth. Of note, PPP spot loans were down to roughly $400,000,000 at quarter end and forgiveness benefit headwinds are substantially behind us. We made continued progress lowering our interest bearing deposit costs, which are now 10 basis points, an all time low, down 3 basis points linked quarter.

Speaker 2

Moving to Slide 7. Given the Fed's recent rate hike and the expectation for Fed funds rate to end the year in the 2 25 basis points to 2 50 basis points range, We thought it would be helpful to discuss why we are confident that we will realize meaningful benefits from rising rates as the forward curve plays out. We entered this rate cycle with a much higher level of asset sensitivity at 10% before the first rate hike in March. This is already starting to benefit NII in the Q1 And it's driving the significant improvement in our full year outlook. And those benefits will continue to accumulate into 2023.

Speaker 2

Importantly, our expected asset sensitivity reflects how we have completely transformed our funding base since CIPO. We are beginning the current up cycle with a very strong liquidity profile. Our LER is much lower, our deposit costs are as low as they've ever been And our overall funding profile is greatly improved. Our period end demand deposits are now 32% of the book And within our interest bearing deposits, our consumer CDs are now less than 3% of total deposits Compared with about 10% at the start of the last cycle, we are also starting this cycle with a much lower level of floating wholesale funding. This improved deposit profile reflects the significant improvements we've made to our deposit franchise since the IPO with improved and expanded retail and commercial deposit offerings.

Speaker 2

We have also enhanced data analytics that allow us to attract and retain more stable deposits. With a better starting position and the improvements in our deposit mix and capabilities, we expect our interest bearing beta to be about 35 Our overall asset sensitivity stands at 7% at the end of the first quarter. This is down modestly from 10% at the end of 4Q, with the decrease primarily driven by the denominator impact of our higher NII outlook, Given the benefits from the April 6 forward curve and the evolution of the balance sheet, pro form a from the Investors acquisition, Asset sensitivity is slightly over 6%. Since the path of the rate cycle is uncertain, on the bottom left side of this page, We've given you an estimate of our sensitivity to further changes in rates, either up or down from the forward curve. Essentially, a 25 basis point instantaneous change in the forward curve is worth about $20,000,000 to $25,000,000 a quarter, With most of that coming from our exposure to the short end of the curve.

Speaker 2

This includes the pro form a impact of investors. Moving on to Slide 8. We delivered good fee results this quarter despite headwinds for capital markets, demonstrating the strength and diversity of our businesses And we drove solid performance across other key categories. Capital markets delivered solid results despite the market volatility, Seasonal impacts and some pull forward into the full Q4 of 2021. Given the strength of our pipelines, capital markets fees could rebound nicely as market Shuttled down and there was more certainty regarding the path of the economy.

Speaker 2

Demonstrating the diversity of our business, We delivered our best quarterly results ever in global markets, a 46% linked quarter as we worked with clients to manage their foreign exchange, Mortgage fees were down 9% linked quarter against the backdrop of lower industry origination volumes given rising rates And seasonal impacts. Strong competition and excess industry capacity continue to pressure margins. Mortgage servicing income improved as higher mortgage rates resulted in slower amortization of the MSR. Card fees and service charges and fees were slightly lower linked quarter given seasonality. Debit transactions and credit card spend continue to exceed pre pandemic levels And wealth fees also remain strong.

Speaker 2

On Slide 9, expenses were well controlled, up 3% linked quarter and just 2% year on year excluding Our top 7 efficiency program is well underway targeting $100,000,000 of pre tax run rate benefits by the end of the year. Period end loans on Slide 10 were up 2% linked quarter. We were pleased to see strong commercial loan growth again this quarter up 2% or 3% ex PPP. Average loans were up 3% linked quarter. Driving this was average commercial loan growth of 3% or 4% ex PPP impacts Led by C and I with growth across almost every region including our expansion markets.

Speaker 2

Average retail growth was also 3%. Line utilization began to rebound a bit with an increase of about 150 basis points to a little over 36% on a spot basis, Primarily driven by corporate banking led by manufacturing and trade as companies look to build inventories to get ahead of supply chain issues and rising input prices And facilitate some M and A activity. On Slide 11, our period end deposits were up 3% linked quarter As we added $6,300,000,000 of lower cost deposits with the HSBC transaction. Excluding HSBC, Period end and average deposits were down slightly given seasonal impacts as well as continued normalization from elevated liquidity levels. Moving on to credit on Slide 12.

Speaker 2

We saw excellent credit results again this quarter across the retail and commercial portfolios. Net charge offs were up slightly at 19 basis points for the Q1 with good performance across the portfolio. Nonperforming Loans increased by $87,000,000 linked quarter, primarily driven by residential real estate secured loans exiting forbearance. Other credit metrics continue to look excellent across the retail and commercial portfolios and criticized loans were lower. While we are mindful of inflationary pressures The higher possibility of recession, we feel good about the improvements in the portfolio we've made over the last few years and the overall positioning of our credit risk.

Speaker 2

In the appendix on Slide 21, you'll see that the risk profile of our commercial portfolio has significantly improved given changes through the pandemic, Including prudent lending and a focus on growing the bigger mid corporate credit portfolio, which is higher rated, as well as reductions in stress Sectors such as retail malls, education and casual dining. On the retail side, we continue to focus on the super prime and prime segments. Our risk profile has improved given our disciplined risk appetite and changes in our portfolio mix, including the runoff of our personal unsecured product. Of note, investors portfolios have performed well in prior cycles and we feel good about them. Moving to Slide 13, we maintained excellent balance sheet strength.

Speaker 2

Our CET1 ratio remains strong at 9.7% at the end of the Q1 after closing the HSBC transaction, which had a 20 basis point impact. We also wanted to mention that we have widened our target CET1 operating range to 9.5% to 10% From 9.75 percent to 10%, reflective of the continued progress we've made in improving profitability, Revenue diversity and overall risk management. Our fundamental priorities for deploying capital have not changed, and you can expect us to remain Extremely disciplined in how we manage the company. Shifting gears a bit on Slide 14, you'll see some examples of the progress we've against the key strategic initiatives and other work we are doing across the bank to better serve our customers and make Citizens a great place to work. As you know, we closed the acquisition of Investors at the beginning of April, further expanding the foothold we established in the New York City metro area Through the HSBC branch transaction and significantly advancing our growth plans.

Speaker 2

In the consumer business, We were excited to complete the upgrade of Citizens Access to a fully cloud enabled core platform, which enhances the capabilities of our national digital bank And it's the first step toward our multiyear objective of convergence with our core banking platforms. We also recently announced Citizens Evervalue Checking, A new overdraft free checking account designed to meet bank on national account standards and increase banking access for underserved communities. On the commercial side, we continue to perform well in the league tables, consistently ranking in the top 10 as a middle market and sponsor book runner. On the right side of the page, we've included some digital metrics. We are very excited with how our digital first approach is increasing engagement with our customers And how this is all translating into a better experience and higher satisfaction.

Speaker 2

Given the significant change in the rate environment and the closing of our 2 bank acquisitions, We provided a comprehensive update to our 2022 guidance on Slide 15. The good news here is that our guide is up from our standalone business. Rates are helping NII more than offsetting the fact that we are down a little on fees. So PPNR is higher and there is no change in our positive view on credit And we remain confident in the outlook for the bank deals. I'll focus my comments on the full year outlook, including both HSBC and Investors, But we've also added the standalone outlook without the bank deals to help isolate performance.

Speaker 2

We have also included a comparison to our original guide January to help highlight what is driving the overall improvement in the full year outlook. The rate scenario used in our outlook is based

Speaker 3

on the forward curve as

Speaker 2

of April 6, Which implies a Fed funds target of 225 basis points to 2 50 basis points by the end of the year. On the long end, this rate curve implies the 10 year to be about 2 70 basis points at the end of the year. It is also useful to keep in mind that the cumulative benefit from rates would also represent meaningful full year effect Upside to NII in 2023. For 2022, we expect NII to be up 27% to 30%, Driven primarily by the improved rate environment and solid average loan growth of 20% to 22%. On a stand alone basis, NII is about 2 $90,000,000 to $330,000,000 better than our prior guidance given the higher rates.

Speaker 2

Average interest earning assets are expected to be up 14% to 16%. Fee income is expected to be up 3% to 7%. On a standalone basis, fee revenue will be about $100,000,000 lower than the January guide As the environment will impact mortgage revenue as well as capital markets somewhat. Non interest expense is expected to be up 18% given the full year effect of HSBC and investors as well as our commercial fee based acquisitions. Credit is expected to remain excellent with net charge offs broadly stable to down slightly for the year.

Speaker 2

And we expect to end the year with a CET1 ratio of about 9.75 which incorporates an anticipated increase in our dividends in the second half of the year. Our capital projections include the impact Our expected notable items for the year, including the integration expenses for the acquisitions and our top seven costs. You can see those in the appendix on Slide 20. Importantly, we expect to deliver positive operating leverage of approximately 2% on an underlying basis for the year, excluding the acquisitions. And if you set aside the impact of PPP, that would be over 4% operating leverage.

Speaker 2

Including acquisitions, we expect operating leverage of over 4% And over 7%, excluding TTP. Overall, we expect our full year ROCE to land solidly within our 14% to 16% medium term target range. Moving to Slide 16, I'll walk through the outlook for the Q2. On a standalone basis, we expect NII to be up 6% to 8 Driven by the benefit of higher rates and solid loan growth. With the bank acquisitions, we expect NII to be up 27% to 29%.

Speaker 2

On a standalone basis, average loans are expected to be up 1% to 2%, led by commercial with interest earning assets up slightly. Fees are expected to be up 3% to 5% on a standalone basis, reflecting some improvement in capital markets and seasonal benefits. Including the acquisitions, fees are expected to be up 7% to 9%. Non interest expense on a standalone basis is expected to be up 1% to 2%, given higher revenue based compensation. Including the acquisitions, expenses are expected to be up 12% to 13%.

Speaker 2

Net charge offs are expected to be broadly stable, and we expect our CET1 ratio to land at around 9.75%. To sum up with Slide 17 and 18, we started 2022 with a solid quarter. We have a winning strategy and are well positioned to succeed given the strength and diversity of our businesses. We are very optimistic about the outlook for the rest of 2022 and beyond. We expect to materially benefit from a higher rate environment and strong loan growth.

Speaker 2

Our Capital Markets business is well positioned as markets stabilize and we are very excited about the opportunity to grow our business in the New York Metro region as we integrate and build on HSBC and investors. We will continue to focus on execution and building a top performing bank that delivers for all our stakeholders. With that, I'll hand it back over to Bruce.

Speaker 3

Okay. Thank you, John. Operator, let's open it up for some Q and A.

Operator

You may withdraw your question at any time by repeating the one zero command. Your first question comes from the line of Scott Siefers with Piper Sandler. Your line is now open.

Speaker 4

Good morning, guys. Thank you for taking the question.

Speaker 3

Sure.

Speaker 4

I was hoping maybe you could spend just a moment discussing sort of magnitude of Recovery you're assuming in the capital markets environment in the forward guide. Looks like you assumed some recovery in the 2nd quarter, but of course moderated the full year target Just curious for some thoughts or color on how you see things trajecting from here?

Speaker 2

Yes, I'll go ahead and start off on that. I mean, I think you had Yes. A number of impacts there that we're building into the guide. I'd say that we mentioned our $100,000,000 guide over guide, Which is driven primarily by mortgage. But there's some capital markets implications there as well given the fact At 1Q, we had some pull forward into the Q4.

Speaker 2

If you look back at the Q4, we had a record quarter, but our pipelines look excellent. And so there could be a little bit of time to build that back into delivering in the last three quarters of the year. But As markets stabilize, we really think that the momentum there is strong. And so maybe Don can cover. Yes.

Speaker 2

I think it's a A

Speaker 5

couple of different cities. So one thing we're seeing is quite a bit of strength in the loan market, syndicated loan market. So while the bond market is particularly high yield and the equity market It's been pretty much closed for the last few months. We're seeing some rotation into the syndicated loan markets as liquidity there Kind of rebuilds, and you've seen quite a dramatic rally in the loan markets over the last couple of days actually, and That's been quite supportive. So I think the second quarter will be really a story about syndicated lending.

Speaker 5

And then if we get a reduction in volatility, we think

Speaker 2

we're going to

Speaker 3

begin to see

Speaker 5

the bond markets reopen a little bit Tilly, we think we're going to begin to see the bond markets reopen a little bit and the equity markets reopen. I will say what John said, which is Our pitch activity, our pipelines and our mandates are extremely strong. And so it's really a matter of waiting for the constructiveness, excuse me, And the markets to return and then we'll begin to bring deals. And we saw 3 or 4 deals start to emerge last week, which we were on And we feel pretty good about particularly the back half of the year.

Speaker 3

The other thing you didn't mention is the M and A pipeline, which I think it still looks really, really good. And again, there if the markets stabilize a little bit, I think we'll start to pull those deals Drew, and it's typically seasonal that the Q4 is huge, which it was for us in 2021. And then The Q1 is usually softer seasonally. Pipelines look good and I think as the year goes we should see a nice build in M and A revenue.

Speaker 5

Yes, I'll also just amplify that Bruce Say a lot of our capital markets and M and A activity surrounds private equity. So private equity is still flush with cash And they actually are looking at quite interesting valuations in the market right now. So it's a matter of matching sellers' Kind of desires and buyers' desires and that will just take a little time to kind of work through the system.

Speaker 3

Yes, good.

Speaker 4

Wonderful. That's good color. Thank you. And then, John, was something you could talk just a bit about how your rate sensitivity changes as the cycle progresses? Meaning effectively, how did the first Few rate hikes look in your mind versus the next several.

Speaker 2

So did you say asset sensitivity or was it just

Speaker 4

In other words, how much more powerful are the first few rate hikes than the next few?

Speaker 2

Yes. I mean, I'd say that the Yes. We mentioned our $20,000,000 to $25,000,000 per instantaneous $25,000,000 rate hike and that's really an average. So you get a little more on the front and maybe a little less as you get to the end of it. And that's really driven by deposit Which are going to be extremely well controlled in the first one hundred and then that starts to build into the second one hundred and then beyond.

Speaker 2

So yes, I you will see possibly a bit more on the front end when we're seeing those that lag effect in deposit betas Contribute a touch more and then it'll be a little lower on the back end. I will mention this the other point That 20% to 25% is an average, but it's also a 1st year average. And so there's actually more upside when you get into Even if it's instantaneous, you still get a lag effect benefit from the asset side as well as assets reprice. So you might See, for example, in year 2, even for an instantaneous 25 basis point change, you would see upside from there in the 15% to 20% range On top of that as you get into role in year 2.

Speaker 4

Perfect. All right. Thank you very much.

Operator

Thank you. Your next question comes from the line of Erika Najarian with UBS. Your line is open.

Speaker 6

Thank you so much for Slide 7. And I guess, John, maybe let me start my line of questioning here. So Your current asset sensitivity from here is 6% pro form a for investors. I guess, I wanted to understand the comment that was made earlier about acceleration, right? So on one hand, we do expect deposit betas to As we are deeper into the rate cycle, but on the other hand, you have some swaps on your portfolio today.

Speaker 6

Can you talk a bit about the interplay of both and how should we think of this asset sensitivity as we move forward And the rate cycle and does the swap portfolio give you a different trajectory for enhanced sensitivity later?

Speaker 2

Yes. Thanks, Erica. I think if you're on Page 7, I mean, I

Speaker 3

think the drivers there

Speaker 2

are That we're entering this cycle much better positioned than the last cycle. When you think about just the starting point with Interest bearing deposit costs being at 10 basis points, an all time low for us. We started the last cycle at 34 basis points. And Our balance sheet position, the mix on the deposit side is much better with 32% non interest bearing. So We feel just much better prepared to benefit from rising rates this time around.

Speaker 2

We still benefited from rising rates last time around by the way, But we're much better prepared to benefit from this side around this time around on deposit betas Given all of the strength on the balance sheet, I think when you ask about balance sheet, I mean, I think and swaps, You really have to think about in the context of the entire balance sheet. So we do have a significant amount of asset sensitivity left to play out. That'll decline over time as NII keeps rising as I mentioned in my remarks, the denominator effect as we And increase our NII that alone reduces the percentage further benefit that could occur for future rate hikes just Dollar for dollar is fine, but the percentage is small. But I do think that there is significant firepower left both with respect to the balance sheet, Loan growth part of the story as well as much more hedging left to do before asset sensitivity gets anywhere near neutral. So that's how I would describe it.

Speaker 2

I mean in terms of deposit betas, again 2022, you're going to see a lot of lag, a lot of lag in the first 100. It will start to catch up maybe in the second 100 basis points and then if we really do get to 300 basis points in Fed funds, you'll see some of that catch up in 2023. And then I'll just close out with Our conversation about NII being up $290,000,000 to $330,000,000 guide over guide is an important thing to focus And that's in a gradual rate rising scenario. It may be it could be it's much higher in a full year effect when you get to 20

Speaker 3

I would just add, Erica, that we've been, I think very keen to leave the asset sensitivity high and not do significant additional swaps. We've done a bit. But anyway, we're still, I think, of the view that rates could go even higher here. So Feel good about how we're positioned right now.

Speaker 6

Got it. And the second question is for you, Bruce. So The stock is having a good start to the day, but the valuation on tangible book value is underneath Your ROTCE landing point for the year either on a standalone or a pro form a basis. I guess, what Do you think in your estimation that the market doesn't understand about the And wondering, I think part of that is the asset sensitivity and deposits. Wondering if you could answer that question the way however way you want to, but also could you give us a sense of how much checking accounts you have for example on the Sumer side versus previous and maybe remind us why you have to keep what seems like a 50 to 100 basis Higher capital level than a lot of your regional peers.

Speaker 3

Yes. There's a lot in that. I'll try to unpack that, Erica. But I think partly that the our objective here is We continue to perform well through cycles. And so we're a relatively new company with a relatively fresh management team.

Speaker 3

And so I think when the market goes into a risk off posture, some assumptions How are they going to do? We're not as we don't have the historical track record of some of our peers, I think. I think we've done a good job of dispelling some of those worry beats when we went through the pandemic and our Credit performance was very good. I think there was some concern for a while that we've grown the balance sheet fairly quickly to get re leveraged after the IPO and Was that going to end in tears? And we've said all along that we've been very disciplined in terms of where we were lending money and how we were allocating capital and I think that's borne fruit.

Speaker 3

I think now with an upcycle, at the beginning of the year when the environment looked like rates were going to go up gradually, To use a Goldilocks example that was the harge was just right scenario. And so our stock performed quite well out of the chute. I think once it became clear that the Fed was behind the curve and was going to start to raise rates much more aggressively, I think then you kind of tipped into it, well, maybe the porridge is too hot. And will our deposit betas Go up too fast and curtail some of the benefit from higher rates. And I think again with all the work we've done and analysis we've Provided we're quite confident that the liability side of this bank is much, much better than it's ever been.

Speaker 3

I've done a lot of hard work on that. And so we still think whether the path is fast or whether it's more gradual, we're going to benefit significantly in terms of interest rates. I'd say also on fees, there's probably a concern that we've built up some areas that maybe are More volatile in Capital Markets and Mortgage is kind of the big fee elements Having said that, I think you've seen that there's good diversity in our fees. And so in a pandemic period when capital markets were a bit softer, Mortgage revenues were really strong given lower rates and we see we can see that flip around, but I think The fact that we've assembled an excellent commercial bank with very strong capabilities and a targeted focus on private Capital and serving private capital and helping the industries that really are the engine of the economy, technology, healthcare with our JMP acquisition. I think we're very confident that we can grow revenues sustainably in Capital Markets and they'll move around a little bit from quarter The quarter, but I think the trend line is upwards and to the right.

Speaker 3

And again, on the mortgage business, I think we've built that out to have a nice diversity of revenues across Wholesale channels and our retail channel, I think we can combat some of the lower production volumes by building market shares. We plan to hire more Mel Lowe's this year. So I think all of these aspects are take time for the market to come around and We appreciate and we'll just keep doing what we're doing and putting up good results and executing well. And then I think ultimately the stock will take care of itself. With respect to the non interest bearing liabilities, I mean, the DDAs as a percentage of the total deposit base Up to about 32%.

Speaker 3

I think when I walked in the door at the time of the IPO that was probably in the low 20s. So that's been a dramatic improvement focusing on total value proposition to certain target And so it's just been a gradual improvement over time as we've enhanced our capabilities and our targeting And we've had nice growth as a result. So I think I'll stop there. Does anybody want to add to that? Brendan, do you want to talk about Consumer deposits or Don on the commercial?

Speaker 2

Yes. I'm

Speaker 3

happy to give a Eric, you had asked about sort of counts of checking account customers. Just Yes. A couple of quick points. When you look at total relationships in the consumer bank, when we went public, we had about 2,900,000 to 3,000,000 customers. We now have 7,000,000 customers in total.

Speaker 3

Now some of those are loan customers. So when you unpack that to core deposit customers, That number is sort of we went from 2,900,000 to 3,500,000 customers. So that's good growth, but that's really not where the action is in Sorry versus sort of heading down this path, really under the covers on that growth, which we've been sort of top quartile growth of our peers, Has been a quality transformation. So there's been a dramatic overhaul in how many customers U. S.

Speaker 3

As their primary bank And more than 100% of the growth in the household base has come from mass affluent and affluent customers. So when you combine the higher quality customer With deeper relationships, that's what's driving a lot of the improvement in DDA and non interest bearing deposits, which is very sustainable. That's Kind of ground game, a lot of work over multiple quarters over a lot of years to get that to scale and look we still have some running room. I think there's still oxygen left in that tank To continue to improve the quality of the customer base, we've made a lot of progress in catching up to peers, but we still have momentum. It does not seem to be slowing.

Speaker 3

I think you should Expect more and more of that putting aside what happens with the excess stimulus deposits under the coverage. The quality story is still continuing and continuing At scale, the other point I'd make mention of as you think about beta for this upcycle. Last time because of the low DDA balances that we had in consumer, we had about And we look a lot more like a bigger I think in terms of deposit composition than we do a smaller sized bank where we're not as rate sensitive in how we're driving deposits Because of that quality transformation that you see in the customer base. Yes.

Speaker 5

I'll just emphasize Bruce what you said in terms of We've gone through a complete reconstruction of our treasury service business. So it was frankly a basket case 6 years ago. And now I would put it up And that's driving an above trend growth rate 7% to 10% in terms of year on year Growth and also driving a SKU towards non interest bearing deposits. And we didn't even have a deposit team 6 years ago. And now we have a built out team, which has got Fantastic analytics, bringing new offerings like green deposits in the ESG agenda and also building a liquidity portal.

Speaker 5

So it's in a totally different place and we're seeing results in terms of deposit levels and we're seeing this skew towards non interest bearing also.

Speaker 3

Yes. So we're giving you a long winded answer, Erica, but I wanted to just come The last thing you touched on, which was ROTCE and also our capital targets. So I think we're pleased that we can say that we'll be solidly in the range for our medium term targets this The 14% to 16%. And you can see that where we were in the Q1 that should ramp and so we could be Even stronger, I think, as we exit the year, so feel very good about that. We did Move the targets from 9.75 to 10 to 9.5 to 10.

Speaker 3

So We moved them modestly. I'm still a big believer in being somewhat conservative on the capital, particularly As I said, we're relatively new company. And so I think all our stakeholders take some comfort from maybe being slightly higher than our peers. But if you look at it over time, we've been converging to peers. And honestly, when you look at the CCAR results and our risk profile, So reason that longer term we'll need to have that premium.

Speaker 6

Thank you for the complete answer.

Speaker 2

Sure.

Operator

Thank you. Your next question comes from the line of Brian Foran with Autonomous. Your line is now open.

Speaker 4

Hey, good morning. Maybe to follow-up on deposits. You've been very clear and convincing on the improvement in the book. So that's Appreciate it and great information. As you think also about the ability to grow deposits over the next 2 years, I wonder, I know there's a lot of moving parts, there's no one answer, but if you could just give your thoughts on the ability to grow deposits overall and maybe I'll Touch on consumer versus commercial and how that might behave as rates go up?

Speaker 2

Yes. Great question, Brian, appreciate it. I think that that if you basically look at excellent opportunities for our deposits over time As our product lineup on both consumer and commercial have improved. And I think if you separate The expectation for as rates rise, there's some impact on how those deposits play out. There's also the surge Deposits that came in, in the pandemic that all appear to be a lot stickier than maybe a lot of us thought when they first showed up.

Speaker 2

I do think more broadly When you think about the macro, deposits have grown consistently over the last several decades under a number of different macroeconomic scenarios, Even through quantitative tightening and the like, the banking industry deposit growth seems to continue to chug along. So we're optimistic that the industry as a whole and we in particular given our significantly Expanded product capabilities, we'll be able to continue to drive really strong deposit growth on both consumer and commercial side. So maybe I'll just Turn it over to Brent and then maybe Don.

Speaker 3

Yes. Look, I think we've demonstrated in a variety of cycles the ability to drive Deposits at scale, the question is always at what cost. And I think we're in a dramatically different position in this upcycle than we were certainly in the last upcycle. We continue to make improvements Sort of on the consumer side, starting with just the breadth of the levers that we've built, whether it's the Citizens Access platform nationally to raise deposits away from our core book, The new markets that we're entering where we've got a solid and stable deposit base, but we think there's a lot of up running room. And in fact, we're starting to see Early signs already of we've got $100,000,000 in inflow of balanced sales already in the New York market from great And solid sales, so we're optimistic continuing to go forward that can continue.

Speaker 3

And as we bring in convert the customer base From investors closely what they want to the platform, we think that same opportunity will exist in New Jersey. And then our analytics have improved Materially over the last couple of years, which allows us to be even more targeted. And when you marry that with what I said a minute ago around just the quality and engagement of our customer base, The confidence of being able to grow deposits with highly engaged customers at more market rates than needing to reach for promo rates is hot. I feel really good that we'll be able to grow at the pace we need with much more moderate costs.

Speaker 5

Yes. I'll just

Speaker 2

I think

Speaker 1

I said a lot

Speaker 5

of it in the last comment around treasury services and the growth of that business. But also remember, we're expanding aggressively in terms of our client base. So we're in Expansion markets, we're adding a lot of clients and with that comes the opportunity to gather deposits at reasonable costs. So we feel pretty good about it. But I'll go back to What Brendan said also, it's really a matter of the day to day balancing of volume versus cost and managing that against the asset side of the balance sheet Where we can redeploy capital.

Speaker 5

So it's something that we manage carefully, but I feel confident that we'll continue to expand the deposit base.

Speaker 4

I appreciate all that. I will say I'm a Citizens Access customer. I'm not loving the renewed beta assumptions you're making, but I guess I'll have to live with it.

Speaker 3

Well, you can count on us continuing to be disciplined yet still competitive.

Speaker 4

Thank you very much. Appreciate it.

Speaker 5

Okay.

Operator

Thank you. Your next question comes from the line of Betsy Graseck with Morgan Stanley. Your line is now open.

Speaker 7

Hi, good morning.

Speaker 2

Good morning.

Speaker 7

Two questions. One was just On the most recent conversation that we had on deposit growth, I was intrigued by that relative to Bruce, your comment about Slowing resi and auto lending growth to, I don't know if this is the right word, but keep the LDR, Protect the LDR at around the 83% level. So I guess I just wanted to understand if that comment about LDR was more about The deposit growth rate that you were talking to just now? Or was that because of the Just opportunities in resi and auto that you're not seeing as much as maybe you have had over the past few quarters?

Speaker 3

Yes. I'd say it's a kind of a factor of a number of considerations. One is that We're already seeing very strong loan demand on the commercial side. We're seeing line utilization tick up. So there can be Somewhat of a rotation over into more growth on commercial.

Speaker 3

Therefore, when we look at consumer and in the higher rate environment, Some of the margins on the lending in areas like auto and mortgage aren't what they used to be. And so we can still get to the Loan growth assumptions that we had coming into the year with that rotation up to more commercial and throttling back A little bit on the consumer side. And we could keep the pedal to the floor and keep Pushing on bringing in those consumer assets, but we think we don't need to do that at this point. We've got NIM going up, the rate hikes is Providing a big lift. And if the marginal return on that incremental lending in the consumer side for mortgage and auto Isn't hitting our hurdles and we have no problem backing off that.

Speaker 3

The net result of that is that that benefits the LDR versus Keeping the pedal to the floor. So we think that's a trade off worth taking.

Speaker 7

Okay. And then just your I guess the underlying question is how high up are you willing for LDR to go? And then I also had just a quick question just on yields in general. Securities book, other retail loans. I'm just wondering was that a function of swap activity that drove up those yields QQ Was there it didn't look like the balances would have driven that QQ, so just wondering how the yields were up there.

Speaker 7

Thanks.

Speaker 3

Yes. Let me start off and then maybe Don and Brendan can add on the yield question. But we've been historically since the IPO, we've had A relatively higher LDR that we worked hard to bring down from the high 90s down into the mid 90s. And then with this big influx of liquidity into the market, we've been able to bring the LDR back down to 80 ish and it's Inching up a little bit here with all the loan growth that we're experiencing. I think we should still be able Managed that in the 80s.

Speaker 3

I can't really call exactly where that's likely to be, Partly depends on the amount of loan growth that we see. But I think just the way we over time brought it from high 90s down into Mid-90s and I think we can take another step function here with all the liquidity that we have in the house and continue to manage that In a reasonably conservative position with lots of liquidity. So that would be my answer there. John, maybe you want to pick up the yields?

Speaker 2

Yes. I'll start off on securities, and maybe Brendan But I can tell you overall that it's not swap activity that's having an impact on either of those. And as it relates to securities, Just to give you a sense, there's 2 dynamics going on there. 1 is the front book where current yields on the stuff going into the portfolio are north of 3 So we're in the 3 to 3 30 basis point range. That's a driver in 1Q.

Speaker 2

It wasn't at that level during 1Q, but it was Well over 2%. It was probably 2.30% to 2.50% during the Q1, and that was compared to maybe 175 In 4Q. So that's the dynamic you're seeing, 175 in 4Q, 230 ish in 1Q, and now it's over 3%. So that will continue into The other dynamic is the back book premium amortization tends it declines when rates rise. So you're seeing the tailwind From that into the securities book.

Speaker 2

And so that's the driver there and maybe Brandon can talk about mortgages.

Speaker 3

Yes. There's a handful of things in the consumer side. So on other retail, there's a good percentage of that book that's variable linked to the market with our merchant partners and such. You're going to see that Kind of ramp up as the market changes. On the resi side, we're obviously a very big lender in HELOC, which is essentially all variable.

Speaker 3

And We've had 4 sequential quarters in a row in net balance sheet growth and believe we're the number one originator in all of the United States and Eloxx are really Striking while the iron is hot and taking advantage of that business. So you're seeing that flow through in the resi book with the yield improvements there as the rates Kind of March North. On the mortgage side, so a couple of things. One is front book pricing. We've been disciplined on front book pricing to the point of being a little out of the market times as the market lags capacity, but we're going to make sure we're using our balance sheet for deep relationships and try to Push our rates up as fast as we can with the market.

Speaker 3

The other just technical dynamic that you're seeing if you're looking at linked quarter on mortgages in Q4, we did have a one time Reserve adjustment to the yields in Q4 that is non recurring and didn't happen in Q1. So if you look back a couple of quarters, you'll see a little bit of noise on what you In Q4, but that's kind of gone. That's sort of washed out. So we should start to see the mortgage book begin to climb with the percentage of that book that is in variable rate and continued

Operator

Thank you. Your next question comes from the line of Matt O'Connor with Deutsche Bank. Your line is now open.

Speaker 2

Good morning. I was hoping you guys could remind us with investors, is there any portion of the loan book or securities book You're looking to kind of deemphasize or runoff? Yes, I'll just start off there. I mean, I think The securities book and investors is it looks has a profile that we would migrate and frankly have already been migrating to our profile, which is mostly clean duration plus mortgage backed securities agency type paper. So we've been in the process of migrating the securities book on that front.

Speaker 2

In general, we like the loan book that comes over from Investors has performed well from a credit perspective. They have a nice core portfolio over there. Maybe Don can talk about anything else That might be migrated at

Speaker 5

the margin? Yes. There are certain elements of the book that might be a little bit different as we move forward, but it's not going to be Quick and aggressive. We're going to do it over we're going to migrate it over time. But a lot of the business that they do is very diversifying for us.

Speaker 5

They're in different elements of the Fine for us there in different elements of the CRE business than we are. So it looks quite different. And then a lot of the C and I businesses is Smaller company, business banking and we're looking to grow that segment as we move forward. So you'll see some adjustment at the margin, but no aggressive asset sales, I think, out of the box. Other than I will say Matt, on my side, we are doing roughly $1,000,000,000 to $1,200,000,000 of BSO Adjustments on the Citizens side and you'll see us do some of that as we move around low yielding assets that we might be acquiring, but we don't have Full plans on that, yes.

Speaker 5

Yes, balance sheet optimization.

Speaker 2

And then I guess obviously there's some opportunities as well to I think I cross sell, but as we think about layering in investors to the kind of medium term, do you think it will have any net impact As we think about your loan growth, either a little bit less than citizen standalone or a little bit more or roughly the same? Well, I mean, I look at it as what Don and Brendan have been able to accomplish when we go into expansion markets, right, in particular, Don's Business in commercial, when we entered the Southeast is a good playbook for how we've been able to grow Those expansion markets are a little faster for a period of time until it converges over time. So I think you would Once we get the engine running with respect to all of the integration and conversion and we've been able To make our investments that we plan to make in New York Metro, I would suspect for a number of years, you could see the growth rates Once that all settles out and baselines, you could see those growth rates actually being higher than Citizens standalone for a number of years until It balances out in terms of the expected market share that we plan to take in that metro.

Speaker 5

Yes. John, I'll also add that they have a very limited product set On the C and I side, so bringing in the variety of products that we can offer and kick those that we can offer, we think there's an opportunity to go after larger companies and To serve their clients in a much more substantial way.

Speaker 3

Yes. Same comments on the consumer side. Our product set is significantly more diversified than both HSBC VC and investors, which is great. And we didn't build those revenue synergies into the deal model. So we're seeing early signs of Significant sales opportunity in New York.

Speaker 3

We're delivering on that. We're starting marketing middle of the year. We're going to convert early on mortgage and wealth For investors inside of 2022 and then the rest of the platform will convert in 2023. So we'll take some time, but we see an outsized opportunity for sustainable revenue growth Over time. Yes.

Speaker 3

Let me just chime in here as well is that we think these deals are going to be a big success And it's really not just the expense synergies which we're going to go get, but if it's a big success, it means that we were successful In cross selling more to the customers who haven't had the benefit of our broader products and services And then just gain market share. And I think we have some very clear ideas about how to go after that both on the commercial side and the consumer side. And really none of that is Has been put into our forward forecast at this point. So goal would be like within 3 to 5 years if New York starts to take on a look and feel of what we built in Boston and what we built in Philadelphia is going to be a home run for us.

Speaker 2

Thank you very much.

Operator

Thank you. Your next question comes from the line of Ken Usdin with Jefferies. Your line is now open.

Speaker 4

Hey, thanks. Good morning. I had a question about reserving and provision. So just looking back at where your We have $133,000,000 ACL is pre ISBC and then just with all Cecil stuff going on. Just wanted to kind of understand where do you think that the reserve lands visavis blended Day 1.

Speaker 4

And what does that mean for further release or provision growth relative to your expectation that you laid out for charge offs? Thanks.

Speaker 2

Yes. That's a good question. I mean, I think the first thing I would say when you're saying blended, if you were speaking about investors on a blended basis, I think that Their profile is actually quite good. And when you look back in different cycles, their loss rates actually are lower And not only ours, but the Regional Bank peer said. So given the collateralization, etcetera, and a number of other things That helped that profile.

Speaker 2

So pound for pound, they come on with a slightly lower ACL and CECL hit to what CFG standalone is, not by a lot and they're smaller, so it won't have a But they come in a little lower than, call it, the 143,000,000 that where we are. So from that perspective, it gives you a sense for How that might cause us to tick down on a blended basis. CECL day 1 was 147, we're at 143. We've cleaned out a lot of the portfolios of concern that might have existed back at the end of 2019 when CECL was adopted. And there's been significant, as we mentioned earlier, and we have in the slide deck in the appendix, significant improvements in both commercial and Cut retail businesses since then.

Speaker 2

So you could see some opportunity, all else equal, for Back book needs as long as the macro holds for those needs to tick down. I think all of the variability will be on loan growth. So we're just going to provide for our loan growth and all in probably be a little lower than we are here, But not by a line.

Speaker 3

The other wildcard obviously, Ken, is what does the kind of long term or the medium term macro forecast look like? And Does look like and can the Fed engineer a soft landing? Is there a higher possibility of recession, which could change that dynamic somewhat? I think certainly, right now with respect to 2022, we feel really good about how we're positioned from a credit standpoint. I would If you ask me to make a call, I'd say it's unlikely we'll have a recession in 2022.

Speaker 3

So at least The clean credit metrics should continue for a while. Whether we can still show net benefits on the provision line, I think Those days are probably numbers. But in any case, I think there's still going to be good numbers. And As John said, the ACL may tick down a little more from here, but it's kind of starting to feel like we're not going to go a huge amount lower.

Speaker 4

Yes. And Bruce, as a follow-up to that, it was good nice to see the commercial line utilization up 150 basis points. You talked about You're reiterating your full year loan growth guidance. Just wondering if you can give us some on the ground color about business activity, supply chain constraints, just in terms of And also the trade off possibly between loans going on the balance sheet versus out the door in capital markets. And just kind of a feel for just how the commercial side of the economy is And how that influences your views on commercial growth?

Speaker 4

Thanks.

Speaker 3

Yes. Let me just say a word and then Don really has the best color. But clearly, it's nice to see the line utilization tick up. Some of it is a little defensive in nature, so people have been worried about their supply chain and inventory levels. And so when they can get a hold of The materials that they need to go out and buy it.

Speaker 3

So I'd say inventory build in light of supply chain Issues probably has been the biggest driver and a little of that also is inflation, which is causing those materials to cost more. So that would be, I'd say number 1. There's still people doing deals, doing smaller deals and playing offense in terms of growth. There's a little bit of that ticking in as well. I think what continues to give us confidence is a thing that Don mentioned earlier that there's Private capital has amassed tons of firepower to put to work in the markets and is looking to get deals done.

Speaker 3

And so there's still Deal related activity that should continue to fuel some loan growth. But with that, let me turn it over to Don.

Speaker 5

Yes. So I think you covered most of it. And back The second half of the question, a lot of the capital markets activity we do is in the leverage buyout area and things like that. So that's origination for distribution business, Which it should be. We don't want a lot of that on our balance sheet and we continue to maintain average holds of about $12,000,000 in our sponsor business.

Speaker 5

So very diversified, Very careful from a risk profile. I will say that the utilization trend that we're seeing is actually even a little bit higher As we sit here in mid April, so that trend really is driven by cost of goods. So there's an inflation aspect and some of the stockpiling. But the broader question is We're hearing generally positive things from our customers. Credit quality is, as we said, feels pretty good.

Speaker 5

There's a little bit of pressure on margins as Companies have varying degrees of inability to pass on cost increases where they're seeing them. But remember that these companies have been through hell over the last 2 years with the pandemic And they've cut their costs. They've restructured their businesses and they're entering whatever we're entering it, whether it be a slowdown or something that's Just slower growth in a much better position from a management standpoint than they were just 2 years ago. So that gives us a lot of confidence. And certain clients are being optimistic.

Speaker 5

We're seeing as Bruce said, we're seeing competitors that are slightly weakened. We're seeing a little bit of M and A activity in the middle market channels that are companies are buying each other

Speaker 3

right now. One last thing you might also add on is on Yes, subscription line financing and some of the securitization. Yes.

Speaker 5

So we're seeing significant volume in our subscription line financing for private equity And significant volume in our asset backed securities businesses in the warehouses. So those markets are very strong and we continue to see growth In the loan books on both of those activities.

Speaker 4

Great. Thanks for

Speaker 2

all the color.

Speaker 3

Okay.

Operator

Thank you. Your next question comes from the line of John Pancari with Evercore. Your line is now open.

Speaker 8

Good morning. I appreciate the color you gave there in terms of the commercial drivers and The trend behind the demand, are you able to perhaps help unpack the high single digit loan growth expectation ex The deals and ex PPP for 2022 in terms of how you think about C and I growth and perhaps growth in your CRE

Speaker 5

Yes. So why don't I start with that. So we're down to basically almost nothing on the C and I side on PTT. So That's in the rearview mirror. So that's not in any of our loan growth projections.

Speaker 5

The loan growth that we've referenced is really CFG loan growth, we've assumed a little bit of growth on the Investors Bank side, but not a lot for the rest of 2022. So all the comments we're making are CFG Specific, I would say subscription lines are growing the fastest.

Speaker 1

C and I is growing

Speaker 5

the 2nd fastest. And Cree, we're seeing very, very modest growth and we're basically on our Cree business really still focused on purpose built office, industrial and life science And a little bit of multifamily, but not a lot. We're really off risk on hospitality and retail, so not a lot of The issue that we're fighting and continue to fight although it's getting a little bit better is our originations are really strong. We're seeing lots of activity both coming into the book and also in the pipeline, but paydowns have been quite high. And this was The Q1 where we saw pay downs begin to decline, maybe that's a little bit of the volatility in the capital markets, maybe that's a little bit of the loan market Aggressiveness right now, but we're seeing a little bit of a benefit from lower pay downs, which were running very, very high last year Almost the whole year and really eating up a lot of the origination activity that we were seeing.

Speaker 8

Okay, great. That's helpful. And then separately on the credit side, just have a question there. In terms of The increase in the NPAs and the increase in the 90 day delinquencies, I know you indicated that's mainly mortgage coming off forbearance. Just want to give you if you could give us a little color in terms of your confidence there in terms of the resolution of those items?

Speaker 8

And then separately, any signs of Faster than expected credit normalization on the consumer side, perhaps in your merchant partnerships or anything? Thanks.

Speaker 3

Yes. It's Brendan. I can take that. On the mortgage side, look, this is fully expected. These are sort of an administrative Customers that have been in forbearance for quite some time.

Speaker 3

We've done extensive analytics on how much loss exposure we have to folks that are coming off of forbearance onto A full repayment schedule and it's de minimis, especially in the mortgage side. We've got very significant coverage on Our loan to value and so we feel really confident in that. Just broadly on the consumer book, We haven't seen much of any early signs that we're starting to see a tick up and return to normal. We're expecting 1, But the delinquency levels generally remain in very strong spot and significantly depressed. Some of the newer portfolios that we've Talked a lot about over the years on these calls and others around student loans and merchant point of sale maintain incredible strength And I've not shown any signs of uptick in early delinquency whatsoever.

Speaker 3

So we feel really confident around the outlook. The state of credit and consumer is at The lowest levels it's ever been and we continue to sort of beat to the positive almost every month on what we're seeing on NCO. So I feel really good. And I think And when you look at the other side of the ledger for the average consumer, they're still showing a lot of excess liquidity. The money in consumer checking accounts is still at all time highs, really hasn't moved down.

Speaker 3

While we're seeing a lot of velocity in customers using credit cards and spending and paying for things. It's not adding to outstanding. So In order to believe that you'll start to see a meaningful correction on the credit line, I think you'd have to see some deflation on the excess cash built up in the consumer's Wallet and start to see a rebound in receivables building up in the credit card. So we haven't seen that. So all the early indicators just aren't moving yet.

Speaker 3

Of course, we do expect it will, but just right now it's not. So we'll take it. I'd just add to that John is All the early warning signs are flashing green, which is great. So on the consumer side, Delinquency roll rates, some of the things Brendan quoted all appear really, really good. Similarly, on the commercial side, The credit class ratio continues to go down and that heightened there's very few Credits that are in heightened monitoring, so that also bodes well for the future.

Speaker 3

You can at these very low levels for things like charge offs And NPAs, you can see kind of one item can kind of move that number around a little bit. But overall, we feel really, really positive about the outlook Credit for certainly the balance of this year.

Speaker 8

Great. Thanks, Bruce.

Operator

Thank you. Your next question comes from the line of Peter Winters with Wedbush Securities. Your line is now open.

Speaker 9

Thanks. I was just curious, are there any plans to manage the available for sale securities portfolio just given the rising rates? Or Any plans to move any of it into like held to maturity or hedge some of this?

Speaker 2

Yes, it's a good question. I mean, I think we're in about a little bit less 10%, call it high single digits of HTM in the Q1. I think you'll see that that number will rise in Q2 based upon a number of things that we're doing, we're putting a lot of securities to work just in CFG standalone, just given the environment now that there's a Highly attractive place to grow the securities book at north of 300% yields just on standalone. And then we're, of course, we've closed on the acquisition of investors, and there's about $4,000,000,000 of There that we're rotating out of the profile that they had into the profile that looks like the kinds of securities that we own. So there's lots of opportunities To address that and you're likely to see the HCM percentage rise in the Q2.

Speaker 9

Okay. Thanks. And then just secondly, Just on the HSBC acquisition, I think at the time of the announcement in May, there was about $9,000,000,000 in deposits And you closed it with $6,300,000,000 in deposits. Do you think at these levels deposits Hold steady, you can grow them. Just that if you could just talk about that change in the outlook.

Speaker 3

Yes. Pre legal day 1, the rundown in deposits Principally driven by their online business and a segment of international customers that were rotating into banks that More global capabilities. And so

Speaker 2

the good news on that

Speaker 3

is that we didn't have to pay a premium of any kind for those customers that we weren't really going to consider core. We had modeled in Essentially twice the level of deposit attrition post legal day 1 than you would normally expect in a deal like that given The profile of the customers that we're banking at HSBC, the good news is since Legal Day 1, it looks like a lot of that attrition had Accelerated pre legal day 1 and we've seen the portfolio at a broadly stable level with good sales, very strong sales And normal expected ins and outflows on the back book. And so we do expect that to be stable now and start to get into growth mode as we ramp up our marketing activities, Which would obviously be a bit of a benefit on the deal model side, offsetting some of the shortfall in deposits we got on Legal Day 1. So we feel really, really good On the early signs that we're seeing, yes, here we are 6 or 7 weeks in.

Speaker 5

Thank you.

Speaker 2

Just to ask, given that we had the transition pre legal day 1, we didn't have to pay for it and it Produces the trend with the attrition happening firstly, I just want to add that data point. Okay.

Speaker 9

Thanks a lot.

Operator

Thank you. Your next question comes from the line of Gerard Cassidy with RBC. Your line is now open.

Speaker 10

Good morning, John. Good morning. Bruce, you said in your opening comments that obviously the focus this year is Integrate the acquisitions you did in the Metro New York marketplace, but in the wealth space if something was priced right that would be something you'd consider. Thinking about the Florida franchise as you build that out, if a depository came up at attractive pricing and again I know you've played us Forward, what you're doing in New York. Is that something that you could consider or you really know we're just We're going to wait until we get these things fully integrated before we consider a depository deal.

Speaker 3

Yes. I don't see us Looking at a depository there anytime soon, I think we've got enough on our plate that getting off to this really great start and launching New York Metro is job 1. We do have a New York Metro is job 1. We do have a strategy in Florida that I think is interesting. So we had A couple of de novo wealth centers, 1 in Palm Beach and 1 in Naples that we focused on launching and starting to get those to The right customer levels and the right staffing so that we can really make some traction in those markets.

Speaker 3

And then we had 5 or 6 Come over from HSBC, very attractive locations and branches with good staffing in the Miami area. And so again, that's job 1 is to try to really make that work what we have and really drive up the Performance of those sites and keep getting smart on the market, keep talking to people, keep trying to figure out kind of where would the next City Beef where we think we could come in and make an entrance and gain some share. So that's To me, the focus and we'll keep trying to get smart in the market, but let's digest what we have and make that productive. The other point I'd make with respect to Florida and elsewhere where we're kind of outside of our core footprint is We're investing heavily in the digital bank. And very recently, we've migrated to a new cloud based core platform, which is really exciting for us and it's going to unlock the Which is really exciting for us and it's going to unlock the ability for us to really broaden our offerings and integrate those offerings On the digital platform.

Speaker 3

And so that's kind of also twinned with some light branches in markets like Florida. Can we really start to bang the opportunity through our digital platforms? And then over time, we'll figure out what Physical presence do we need to complement those digital offerings. So it's pretty exciting. We have a similar Opportunity in the Greater Washington area where we picked up, I think it's 9 or 10 branches from HSBC.

Speaker 3

So we can try to attack that market through digital and decide is 9 or 10 the right number? Are they in the right locations? Do we need to alter that? And then using test and learning from Florida and from D. C, are there some other attractive cities where we might want to go Next and really put effort into growing the digital presence combined with some thin branch presence.

Speaker 10

Very good, Bruce. And to pivot, the next question is on deposits. How do you guys weigh you talked about how certificates of Have come down dramatically. You've got a very strong DDA balance core now, much higher than when you went public, of course. With rates moving up so quickly now, the 10 year is almost at 3% today, when does long term funding with low cost CDs make And then Don, when do your customers start asking for higher compensating balances as rates move up?

Speaker 10

Have you guys seen more discussions there as well on the compensating balances on the commercial side?

Speaker 2

Yes, I'll go ahead and start. A couple of thoughts there. I mean, I think that as you heard from Brendan earlier and you saw on our Slide 7, Our CD portfolio is much smaller than it was before and what that will have to start. And I think what the point there is that CDs could be part of the story, and but we would do it in a way that's connected to a deep customer relationship rather than sort of a To do wholesale funding approach, which is I think how things got played out early in the last cycle for us, whereas this cycle is all going to be about customer relationships. I think the other thing to keep in mind is that over the last cycle, right, we expect CD The debate is to be lower during the cycle in part due to how quickly you think the cycle is going to go.

Speaker 2

The last cycle took a longer time, 2 to 3 years. And so you kept getting that ratcheted up cost of CDs every time they came to maturity. So I do think CDs can be part of the story Given deep customer relationships and a shorter cycle CDs can absolutely be something a tool that we'll utilize coming off a lower base. So that's the first point. And the second point is that on the commercial side, you will have balance migration, that's natural as compensating balances don't need to be quite as Hi.

Speaker 2

As earnings credit rates actually rise over time. So yes, there'll be some of that migration that's built in The deposit betas that we articulated earlier and built into our deposit costs overall. And so, but it's the same point there Given the number of ways that we can interact with our customers on the commercial side, we're deepening our relationships there and expect that Those migrations will be well controlled and as expected.

Speaker 5

Yes. And I think that's exactly right. And we've actually gone out over the last Month or so with a full or information package with all of our bankers to discuss deposit and pricing levels as part of the overall relationship with all of our Relationship Manager. So we're well on top of it. We have had some people pull deposits, but we haven't had a problem backfilling and bringing in Other deposits to basically cover any outflows.

Speaker 10

Great. Thank you for the color.

Speaker 3

Okay. All right. I think that's it for the questions in the queue. And let me just close by thanking everybody again for dialing in today. We appreciate your interest and your support.

Speaker 3

Have a great day. Thank you.

Operator

That concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Citizens Financial Group Q1 2022
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